The Petroleum System Is Entering Its Volatile Decline Phase

Infographic of oil price shocks since the 1970s, by author with ChatGPT.The 1973 to 1974 Arab oil embargo is still the defining image of modern oil vulnerability. Federal Reserve historical material notes that the embargo helped push oil from roughly $2.90/bbl before the embargo to $11.65/bbl by January 1974. That was not just a price movement. It was a political and economic signal that oil was not an ordinary commodity. It was tied to foreign policy, military logistics, inflation, trade balances, consumer confidence, and the physical movement of goods and people. Once the world learned that lesson, it kept relearning it.The next shocks showed that petroleum instability could come from almost anywhere in the system. The 1979 Iranian Revolution and the 1980 Iran-Iraq War showed that oil markets are vulnerable not only to producer policy, but to the internal stability of producer states and the security of the regions around them. The 1990 to 1991 Gulf War was a chokepoint and regional-security shock. The early 2000s brought Venezuela’s strike and the Iraq war period. Katrina and Rita showed that a wealthy importing and producing country could still suffer product-market stress from refinery, port, and pipeline disruption.The modern period added new forms of volatility. The 2008 spike showed how demand growth, financial pressure, and constrained supply can produce a price surge without a single neat military trigger. The 2011 Libya disruption showed how political upheaval in one producer can matter when the market is tight. The 2014 to 2016 price collapse showed that OPEC strategy and shale growth could produce a different kind of shock, one that damaged producer revenues rather than consumer budgets. The 2020 COVID crash showed that demand destruction can be violent enough to push parts of the oil market into absurd territory, including negative WTI futures in April 2020. The 2022 Russia shock reminded the world that oil and gas are embedded in war, sanctions, shipping, insurance, and finance.The current Strait of Hormuz shock is not a replay of the 1973 to 1974 OPEC embargo, but it rhymes with it in important ways.

The 1970s shock was a producer-country political embargo that showed importing economies how exposed they were to concentrated oil supply. The 2026 shock is a physical chokepoint and infrastructure crisis layered onto war, shipping risk, LNG disruption, aviation rerouting, insurance costs, and already-weakened oil demand. Fatih Birol of the International Energy Agency has described it in far stronger terms than the usual oil-market language, calling the current crisis “the biggest crisis in history” and saying it is more serious than the 1973, 1979, and 2022 crises combined. The IEA’s April 2026 Oil Market Report called it “the most severe oil supply shock in history,” noting that oil prices posted their largest-ever monthly gain in March and that North Sea Dated crude was trading around $130/bbl, about $60/bbl above pre-conflict levels. The IEA has also said the volume of fuel supply offline is higher than during the 1973 shock that led to the agency’s creation, with Hormuz normally carrying around 20 million barrels per day of crude oil and oil products, about one-fifth of global oil consumption. The comparison matters because the 1970s shock created the modern energy-security system. This one is exposing how much of that system still rests on oil moving through narrow sea lanes, fragile regional politics, and producer states whose incentives are changing as electrification erodes the old demand-growth bargain.The inflation-adjusted monthly oil price chart in the infographic above makes this visible. In nominal terms, the 1970s look small because dollars have changed so much. In March 2026 dollars, the 1970s and early 1980s shocks become large again, and the 2008 and 2011 to 2014 period stand out as a prolonged high-price era. The point is not that every shock is identical. The point is that oil has never been a smooth input into the global economy.The old oil-stability model worked as well as it did because demand was expected to grow. OPEC and later OPEC+ could ask members to restrain supply today because the unsold barrel was expected to be valuable tomorrow. That is the central bargain of a producer cartel in a growing market.

If everyone believes future demand will be larger, then discipline today can raise total revenue over time.That bargain was always imperfect. OPEC has always had quota cheating, baseline fights, Saudi frustration, producer rivalries, and non-OPEC supply responses. High prices encouraged conservation, efficiency, offshore exploration, unconventional oil, and eventually shale. Low prices stressed public budgets and led to overproduction. Saudi Arabia acted as swing producer when it thought the bargain was worth maintaining, but it has also chosen market-share fights when the burden became too uneven. OPEC cohesion has never been a permanent fact. It has been a repeated negotiation.OPEC+ was a recognition that OPEC alone no longer controlled enough of the global oil system. The addition of Russia and other producers gave the group more scale, but it also made coordination harder. Russia’s incentives are not Saudi Arabia’s incentives. Kazakhstan’s incentives are not Iraq’s. The UAE’s incentives are not Algeria’s. In a growing market, those differences can be managed. In a shrinking market, they become harder to paper over.Electrification changes the psychology of the barrel. The old bargain was simple: restrain supply today because the unsold barrel should be valuable tomorrow. Electrification weakens that bargain by making the deferred barrel look less like stored value and more like future risk. That is a profound change in producer incentives. It does not require oil demand to crash overnight. It only requires enough producers to believe that demand growth is ending and that the long-term curve is no longer their friend.This is where the UAE’s exit from OPEC matters. It is not just a quota dispute. It is a signal from a wealthy, capable, low-cost Gulf producer that flexibility and volume may be worth more than cartel discipline. The UAE has invested heavily in production capacity. If it can sell more barrels outside the quota structure, it has a rational reason to do so, especially if it believes future demand is uncertain. Other producers will notice.The demand side is moving faster than oil institutions were designed to handle. Passenger EVs are now mainstream in China and Europe and are moving into many other markets. Electric buses are normal in China and common in many cities. Electric two-wheelers and three-wheelers have already displaced petroleum demand across parts of Asia. Delivery fleets are electrifying because depot charging, predictable routes, and high use rates make the economics work.

The new pressure point is heavy trucking, where China is already showing that battery-electric trucks can move from niche to material market share. When a segment as diesel-heavy as trucking starts to bend, oil demand forecasts have to change.China matters because it was the central oil-demand growth story for a generation. If Chinese gasoline and diesel demand are flat or declining while GDP continues to grow, the relationship between economic growth and oil demand is breaking. That is not a small adjustment. It is a signal that electrification, rail, logistics efficiency, and industrial policy are changing the demand structure. The International Energy Agency has already noted that Chinese gasoline and diesel demand have stopped behaving like the old middle-income growth story. IEEFA has reported that battery-electric heavy-duty trucks reached close to 22% of Chinese heavy-duty vehicle sales in the first half of 2025, up from under 9% a year before. That is a large change in a segment that many oil forecasts treated as resistant to electrification.Aviation is often used as the refuge of oil demand. Passenger cars electrify, buses electrify, some trucks electrify, but jets still burn liquid fuel. That is true physically, but it does not mean aviation demand is a growth savior. COVID normalized remote work and video meetings. Business travel did not recover as if nothing had happened. The 2026 Gulf disruption has again made aviation through the region more expensive and less reliable. The EU is pricing aviation emissions and requiring sustainable aviation fuel blending. Jet fuel can remain hard to replace while aviation demand is flat or pressured. Those two facts can coexist.A flat aviation sector is a problem for bullish oil demand models. If road fuels decline and aviation only holds steady, aviation does not offset the loss. If jet fuel prices spike because of war risk, rerouting, insurance, or fuel supply problems, some trips disappear, some meetings move back to Zoom, and some companies rediscover that the cheapest barrel is the one they do not buy. Aviation is not immune to price and risk. It is just harder to electrify directly.There is another demand effect that is easy to miss. The fossil fuel industry is one of the world’s largest consumers of fossil fuels. Exploration, drilling, pumping, steam generation, upgrading, refining, liquefaction, compression, pipeline operations, shipping, mining, and petrochemical processing all require energy.